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Why You Should Care About Lands’ End, Inc.’s (NASDAQ:LE) Low Return On Capital

Laura Kearns

Today we are going to look at Lands’ End, Inc. (NASDAQ:LE) to see whether it might be an attractive investment prospect. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First, we’ll go over how we calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.’

How Do You Calculate Return On Capital Employed?

The formula for calculating the return on capital employed is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)

Or for Lands’ End:

0.05 = US$33m ÷ (US$1.1b – US$295m) (Based on the trailing twelve months to November 2018.)

So, Lands’ End has an ROCE of 5.0%.

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Is Lands’ End’s ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. We can see Lands’ End’s ROCE is meaningfully below the Online Retail industry average of 9.1%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Regardless of how Lands’ End stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). It is likely that there are more attractive prospects out there.

Lands’ End’s current ROCE of 5.0% is lower than its ROCE in the past, which was 9.4%, 3 years ago. This makes us wonder if the business is facing new challenges.

NasdaqCM:LE Last Perf January 18th 19

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for Lands’ End.

What Are Current Liabilities, And How Do They Affect Lands’ End’s ROCE?

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counteract this, we check if a company has high current liabilities, relative to its total assets.

Lands’ End has total liabilities of US$295m and total assets of US$1.1b. As a result, its current liabilities are equal to approximately 26% of its total assets. This is a modest level of current liabilities, which will have a limited impact on the ROCE.

Our Take On Lands’ End’s ROCE

While that is good to see, Lands’ End has a low ROCE and does not look attractive in this analysis. But note: Lands’ End may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

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To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.